Exam 10: Externalities: When the Price Is Not Right

Reference: Ref 10-7 (Figure: Softella) The figure shows a market for medicated tissues. Assume that the only use for these tissues is to wipe and clean one's hands thus preventing germs from spreading to other people. What is the dollar amount of the external benefit (per box) that is created by the use of this product?

The social cost of pollution includes the private producer costs plus the costs to bystanders adversely affected by the pollution.

Which of the following statements is INCORRECT?

Antibiotics may be ________, since people consider only the ________.

Why are taxes on pollutants and tradeable allowances considered to have similar effects in solving externality problems?

In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

Government can be used to solve externality problems that are too costly for private parties to solve.

The Clean Air Act of 1990:

Antibiotics tend to be overused, as the producers of antibiotics are required to bear all the costs of antibiotic use.

Tradeable allowances:

Which of the following statements is TRUE?

Which of the following statements is TRUE?

Using a demand and supply diagram demonstrate how the market equilibrium would differ from the efficient equilibrium when external costs are present. Shade in the area of deadweight loss, and be sure to label all axes and curves.

The Coase theorem posits that externality problems can be solved without government intervention

While the Coase theorem is appealing, private actors often fail to resolve the problems caused by external costs and benefits.

When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

Private solutions to externalities are most likely to occur when there are:

External costs lead markets to produce a smaller quantity of a good than is socially desirable, while external benefits lead markets to produce a larger quantity of a good than is socially desirable.

Which of the following answers correctly identifies social cost?